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Competitive Market
Market with many buyers and sellers, goods are identical, firms can freely enter and exit the market
Price Taker
A buyer or seller that must accept the market price; cannot influence the price.
Total Revenue
The total amount of money a firm receives from selling its goods, calculated as (P*Q)
Average Revenue
TR/Q
Marginal Revenue
The change in total revenue that results from selling one additional unit of output. ΔTR/ΔQ
Profit Maximization
The process of increasing profit by reallocating resources until MR=MC
Marginal Cost
The additional cost incurred by producing one more unit of a good.
Average Total Cost
TC/Q
(Temporary) Shutdown Point
Short run decision. The level of output at which TR<VC ; below this point, a firm will cease production.
Economic Profits
Profits remaining after all costs, including opportunity costs, economic profit= TR-(explicit cost+implicit costs)
Zero Economic Profit
A situation where TR = TC, including both fixed and variable costs.
Rational Decision Maker
An individual or firm that makes choices aimed at maximizing benefits while minimizing costs.
Sunk Costs
Costs that have already been incurred and cannot be recovered; they should not influence current decisions.
Long-Run Equilibrium
A situation where firms in the market make zero economic profits and operate efficiently at minimum average total cost.
Increasing Costs
A condition where the cost of production increases as more firms enter the market, affecting supply.
Fixed Costs
Costs that do not change with the level of output produced.
Variable Costs
Costs that change with the level of output produced.
Market Entry
The process through which new firms enter a market in response to profitable opportunities.
Market Exit
The process by which firms leave a market when they incur losses.
Profit Equation
A formula that represents profit as total revenue minus total costs.
Competitive Firm’s Short-Run Supply Curve
The portion of the marginal cost curve that lies above the average variable cost.
Efficient Scale
The level of output at which average total cost is minimized.
Upward Sloping Supply Curve
A supply curve that shows an increase in quantity supplied as price increases.
Marginal Benefit
The additional benefit derived from consuming or producing one more unit of a good.
Long-Run Market Supply Curve
A supply curve that reflects the ability of firms to enter or exit the market, typically horizontal.
Average Profit Per Unit
Total Profit/Q
Short-Run Decisions
Decisions made by firms that consider fixed factors and current market conditions.
Long-Run Decisions
Decisions made by firms when all factors, including inputs and costs, can be adjusted.
Profit Loss Scenario
A situation where total revenue is less than total costs, resulting in a negative profit.
Competitive Firm Characteristics
Features of firms in a competitive market, such as being price takers and maximizing profits.
Quantity Supplied
The total amount of a good or service that producers are willing to sell at a given price.
Economic Theory of Supply
A theory that explains how supply behaves in response to changes in price and market conditions.
Cost Curve Relationships explain
The connections between various cost curves that inform the supply decisions of competitive firms.
Market Equilibrium
A state where supply equals demand, and there is no incentive for price to change.
Cost-Benefit Analysis
A systematic approach to estimating the strengths and weaknesses of alternatives.
Output Levels
The quantities of goods produced by firms at different price levels.
Loss Minimization
Strategies used by firms to reduce losses when total revenue is below total costs.
Opportunity Cost
The cost of forgoing the next best alternative when making a decision.
Competitive Market Dynamics is
The changing nature of supply and demand within competitive markets.
Temporary Shutdowns are
A short-term stopping of production due to insufficient revenue to cover variable costs.
Profit maximization rule
MR=MC
LR comp. Firms supply curve
In the long run, all things are variable. If firms have negative economic growth, in the LR they exit the market.
Sunk cost
A cost that has already been committed and cannot be recovered. Fixed costs are sunken costs, the firm pays fixed costs whether it shuts down or not.
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